EBA欧洲银行-ReportCommoditiesriskassessment15062007_000_44页_602kb

Summary of CEBS's Technical Advice on Commodities Business under Article 48 of Directive 2006/49/EC

Core Content

This report provides a comprehensive assessment of prudential risks associated with commodities business and the activities of firms engaged in such business, as requested by the European Commission in its Call for Advice (No. 6) of 16 August 2006. The analysis is based on responses from 26 EU member states, three EEA members, and various industry participants, including traders, brokers, and exchanges. The report also includes a revised and detailed description of the US commodities regime, collected through direct engagement with US authorities and market participants.

Main Findings

1. Market-Level Risks

• Commonalities: The risks in commodities markets are generally similar to those in other financial markets such as equity, FX, and interest rates.
• Sub-markets: Markets for a specific underlying can be subdivided due to localisation restrictions, but differences in term or settlement (e.g., physical vs. financial) do not create independent markets.
• Natural Positions: Producers and industrial consumers have "natural" long or short positions, which are distinct from speculative positions held by institutions or traders.
• Risk Mitigation: While some risk mitigation techniques are used, such as clearing houses and margining, OTC trading remains prevalent, leading to significant counterparty credit risk (CCR).

2. Systemic Risk

• Contagion Mechanism: Systemic risk arises from interdependencies between markets and participants. However, the magnitude of systemic risk in commodities is considered smaller than in banking or investment services.
• Examples: The report highlights past market failures like Etlafric (concentration risk), Sumitomo (operational risk), Enron (operational risk), and Amaranth (liquidity risk) as case studies.

3. Firm-Level Risks

• Market Segments: Firms are segmented into producers, distributors, institutions (credit institutions and investment firms), hedge funds, and mutual funds/pension funds.
• Institutional Risks: Credit institutions and investment firms are exposed to the full spectrum of prudential risks due to their active participation in commodities derivatives.
• Hedge Funds: These entities, due to their high leverage, can significantly affect liquidity and prices in specific commodity segments.
• Pension Funds: Increasingly investing in commodities for diversification, though typically limited to 5% of their portfolio.

4. Risk Management Practices

• Credit and Counterparty Risk: Mitigated through clearing houses, exchanges, exposure limits, master netting agreements, and collateral.
• Market Risk: Managed using VaR models, confidence intervals (95-99%), and stress-testing.
• Operational and Liquidity Risk: Generally managed qualitatively.

5. Critique of CRD Requirements

• Inappropriateness: The CRD capital requirements are deemed not proportionate to the risks in commodities business.
• Shortcomings: The use of spot prices for forward/future positions in the Standardised Method (Maturity Ladder Approach) is considered inappropriate. Also, the CRD's large exposure and free delivery regimes are not suitable for commodities due to longer delivery periods and larger exposures.

6. Regulatory Implications

• Current Framework: The EU currently applies a three-tier regulatory approach to commodities business.
• Exemptions: Some investment firms are partially exempt, while others are completely exempt from prudential regulation.
• Regulatory Changes: The report assesses the implications of abolishing or maintaining exemptions under MiFID and CAD, but does not make legislative recommendations.

Key Information

• Methodology: CEBS used a detailed questionnaire and collected information from third countries (U.S.A., Australia, Switzerland) to inform its analysis.
• Industry Participation: 22 responses were received from industry participants, with 11 requesting confidentiality.
• Public Engagement: Findings were discussed with industry experts and will be subject to a public hearing on 9 July 2007.
• Future Considerations: The report highlights the need for a more tailored prudential regime that appropriately reflects the unique risks of commodities business, while considering possible exemptions for certain market participants.

Conclusion

The report emphasizes that while systemic risk in commodities markets is present, it is generally less severe than in other financial sectors. It identifies the need for a prudential framework that better aligns with the specific nature of commodities business, including the use of appropriate risk mitigation techniques and the recognition of market-specific characteristics such as seasonality, volatility, and physical settlement. The analysis serves as a factual basis for future regulatory discussions rather than providing direct recommendations.